Borrowers are in luckWritten by Nolan Baker Mark Clair | | email@example.com
Rates are the lowest they have ever been. I know that sounds like a sleazy car salesman ad. But in reality, since the Federal Reserve cut rates to a target rate of between 0 percent and 0.25 percent Dec. 16, rates are the lowest in history. That’s great news for borrowers, but it is terrible news for many retirees living off their savings.
Strategies for savers
According to www.bankrate.com, the national overnight rate on a five-year CD is 3.44 percent. So if you had $100,000 in one of these bank CDs, you would be earning $3,440 a year in interest. If you are in the 25 percent tax bracket, you get $2,580 after taxes. So for many people living on a fixed income, they have already, or are about to see, a big pay cut.
There is a solution: It’s called a split annuity. An annuity is an investment account offered by an insurance company. Typically, insurance rates tend to change more slowly than rates at banks. So there may be a window of opportunity for you to lock in a much higher rate with an insurance company.
First, you deposit $20,000 into an immediate annuity and have it pay out over a five-year period. This account would provide $4,000 a year, and because a significant amount of the money sent to you would be considered a return of your original investment, nearly all of the money would be tax-free. That’s more than a 50 percent immediate pay raise to your current income.
Second, you deposit the other $80,000 into a five-year deferred annuity. If you earned 5 percent on your deferral account, it would grow back to $102,103 after five years. After five years, you would have more than $4,000 in tax savings alone. Plus, due to the triple-compounding effect of the deferral account, you would have an additional $2,103 accumulated in your account. Add that to the tax savings, and that’s more than $6,000 of additional dollars.
Now since an annuity is an insurance product and doesn’t have Federal Deposit Insurance Corporation, you should do your homework. Ask about the history of the company, and although past performance doesn’t guarantee future results, how long the company has been around is important. Next, in light of the credit crisis and the fallout of banks and insurance companies, check the insurance company’s ratings. Finally, be sure to check to see how long your rate is guaranteed. Watch for the companies that offer a high first-year rate as a marketing gimmick.
Lock in lower rates
The national average rate on a 30-year mortgage is just a little more than 5 percent. It could be a great time to refinance your mortgage. Lock in your rate now, especially if you have an adjustable-rate mortgage. This could also be a good time to clean up credit card and other bad debt to lock in a lower tax deductible rate.
If you aren’t interested in consolidating your other debts into your mortgage, you should still act. Consider looking at your rates on your auto loans and see if you can lock in a lower rate by calling your banker. Or if you have credit card debt, look at getting a lower rate by shopping around.
For more information about The Retirement Guys, listen every Saturday at noon on 1230 WCWA and every Sunday at 11 a.m. on 1370 WSPD or visit www.retirementguysradio.com. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC. 7135 Sylvania Ave, 2B.